Your company is proposing to erect a new factory in a foreign country at a cost of 20 million local currency units. Return cash flows will amount to 27 million local currency units per annum and will be spread over five years. What actions would you take to preserve the profitability of this venture in terms of your home currency?

Advanced Financial Management Block Revision Mock Exams

The profitability of the venture may be preserved by:

• Entering into agreement to receive cash flows in terms of home currency only. If the local currency is weaker compared to the home currency, this can be done by negotiating for a 5 year loan of 20 million currency units.
• Repay the loan in 27M local currency units so that long term assets (new factory) would be matched with long term liability (loan)
• If the firm has 20M currency units, it can be invested in local or home country where local currency is expected to appreciate.

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